Month: February 2007

Immigrants: Your Country Needs Them

That is the title of this new book by Philippe Legrain, and no I don’t know how you can buy it outside the UK.  Legrain is also the author of the excellent Open World, a defense of economic globalization. 

This work is the single best non-technical defense of a liberal immigration policy.  What I liked most was how
it put U.S. debates in a broader context; most American sources don’t
do this.  For instance how normal or extreme is the American experience
compared to other histories of absorbing immigrants?  The book is original in this regard, yet without moving beyond easily
understood arguments.

I do understand the
concerns raised by Steve Sailer and others against immigrants, and I
readily grant that the idea of open borders is a non-starter.  But is
the United States today in a position where Latino immigrants are
tearing us apart?  I think not.

Yes I know your anecdotes, but here is what it would
take to budge me.  Do a study of real estate prices in San Diego, Santa
Ana (a largely Mexican part of Orange County), and the relevant
sections of Houston, among other locales.  Show me that real estate values in those areas
are falling or even plummeting, and yes I do mean in absolute terms and
no the recent collapse of the real estate bubble doesn’t count.  Then I’ll
give the issue another look.  Otherwise the worst I am going to believe is that "things are not getting better as rapidly as they might otherwise be," and that, whether or not you like such a possible state of affairs, does not represent the sky falling.

But for purposes of balance, here is the most anti-immigration post I have written.  Here is an interesting recent paper on migration.

Addendum: Here is a good article on immigrant entrepreneurs.

Dr. Neruda’s Cure for Evil

I’ve loved Rafael Yglesias’s book Dr. Neruda’s Cure for Evil for about ten years, but only Friday, when browsing in the library, did it occur to (silly) me it was also The Best Novel By A Father of A Major Blogger.

The story, told by literary flashback, turns around a doctor who encourages his patients to relive their childhood traumas but goes one step or more too far.  One review: "Entertaining, thought-provoking, shocking, enlightening, puzzling, this fascinating work
tackles many issues such as incest, insanity, the nature of love, the drive for power,
religious, business and political creeds, therapeutic ethics — and, of course, what (or who)
is evil."

Somehow, unjustly, the book never captured the "For Smart People Who Are Looking for Conceptual Yet Fun Fiction Along the Lines of Byatt, Eco, and Calvino" slot that grabs so many readers.  It seems largely forgotten. 

By the way, here is the son’s post on government contracting.  Here is yet another generation up.

School Choice in Utah?

Utah could be getting a reasonably serious school choice program.  In Friedman’s vision it is students that are funded not schools and students are funded equally regardless of where they choose to attend school – i.e. no fiscal discrimination.  In the Utah plan, in contrast, the voucher money is still less than is spent per public school student and it is means tested.  Nevetheless, the voucher is reasonably large and the program is state wide which together would make it the most significant voucher experiment in the United States.

Thanks to Fred Hastings for the pointer.

What is adverse selection anyway?

Let me again cite Alex’s strong arguments against the importance of adverse selection in insurance markets.  Here is Paul Krugman, and here is Brad DeLong, both of whom see adverse selection as the central health care problem.

How can we square these differing points of view?

When I argue that adverse selection is not the key, I hear a common response: "*You* try getting insurance after you have been diagnosed with an advanced brain tumor," or something along those lines. 

To be sure, this is a real point but it is not adverse selection.  Adverse selection requires asymmetric information, namely that I know more about my brain tumor than does my potential insurance company.  The more likely problem is that the tumor is common knowledge, or would be if I applied for insurance, and the company won’t sell a policy for any price cheaper than the costs of treatment.  There is no asymmetry of information, rather insurance simply is no longer possible.  In the limiting case, imagine that a predictor-demon could forecast your lifetime medical expenditures with certainty, and then blog them by your social security number.  Such a person, no matter how healthy, couldn’t buy insurance either.

Scream all you want, but that is not inefficient per se (don’t complain in the comments about the limits of the efficiency concept, and the cruelness of economists, I’m already on that one, scroll down to #7 under "microeconomics", alternatively you might make a complicated Rawlsian argument.)  Covering these people, by the use of government policy, is a transfer, not an efficiency improvement, with an added caveat for imperfect capital markets.

Defenders of the adverse selection argument in reality believe the following: if someone is going to face death, or a very bad medical outcome, and can’t buy their way out of it, government should put up the money, at least within limits.

Maybe yes, maybe no, but now we are comparing competing investments and which will bring the greatest utilitarian good and the greatest moral good.  I’m far from convinced health care access wins that race or even comes in second.

And that is a general point, it is not about the United States and whether we pay more to get less compared to Europe, and so on.  Please don’t bring up that comparison to distract yourself from the logical force of this point or to think you can get a free lunch.  If you wish, think of it as whether the Netherlands should subsidize as much health care as it does. 

The point is this: defenders of the single-payer system, by invoking adverse selection, wish to claim efficiency on their side.  If the single-payer system were more efficient, we would not have to worry about competing investments, in fact we could make more of such investments by moving to a single payer.

But what looks like adverse selection is in reality something just a wee bit different.  That wee bit, however, is an important bit.  The desirability of the supposed remedy follows from an ethical judgment, not the prospect of a Pareto improvement.  And then we are back to comparing alternative investments for scarce resources.

I see the big marginal gains in lifestyle and in pharmaceuticals, not in access to health care per se.  And that is another reason why I am skeptical of the single-payer arguments.  That is without even considering the possible secondary consequences of so much government involvement.

I haven’t dealt with the Rawlsian approach, which attempts to transform the ex post disaster into a case for ex ante insurance and thus returns us to the realm of efficiency.  But if you reread the paragraph immediately above, that Rawlsian move, even if it succeeds on philosophical grounds (I am skeptical), still won’t save the case for a single-payer system.

Prizes with no takers

In a paper posted online in the current issue of the journal
Psychological Medicine, a team of psychiatrists and literary scholars
reports that it could not find a single account of repressed memory,
fictional or not, before the year 1800.

The researchers offered
a $1,000 reward last March to anyone who could document such a case in
a healthy, lucid person.  They posted the challenge in newspapers and on
30 Web sites where the topic might be discussed.  None of the responses
were convincing, the authors wrote, suggesting that repressed memory is
a “culture-bound syndrome” and not a natural process of human memory.

Madame Tourvel, in Dangerous Liaisons, was the closest they found to an example, but the character did not come close enough.  Here is the story

You can submit your suggestions here, I should note I am not convinced by the lack of a winner.  People can be oddly unable to recognize a pattern until they understand the pattern; just think how late in human history the first good explanation of supply and demand comes (North? Steuart? Smith? Bailey? Longfield?), and that is a fairly basic economic concept which can be taught to most high schoolers.

Which bum should get the money?

Tim Harford, writing in Saturday’s FT, allows us, as benevolent utilitarians, to ask ten bums one common question, and upon hearing their answers we give a donation to one of them.

I am never one to believe that cheap talk has zero value, if so why would I write (or you read) a blog?  So what questions might be asked?  The bums know the game, so of course they are tempted to lie.  Alex, Tim and I pondered this one over lunch.

1. Alex’s idea: ask each bum "who deserves the money the most?"  If they have repeated dealings with each other, the folk theorem might kick in and the group will nominate the wealth-maximizing recipient and institute side payments.  This may or may not maximize group utility as well.

2. Ask each bum "what are you doing here?", with a provocative tone of voice.  Give the money to the bum with the rudest, least polite answer.  He is least likely to get funds from elsewhere, plus the polite bum is probably a drug addict or otherwise totally dysfunctional.

3. Take advantage of the human proclivity to boast about knowledge.  Ask each bum what is the best way to find or to drink cheap alcohol, and give the money to the bum who shows the least expertise.  This was also an Alex idea.

4. Find the single question best correlated with the results of an IQ test.  Give the money to the stupidest bum, who is likely to be unlucky more than self-destructive.

Alternatively, say you had to tax one of ten rich men, and had one question to ask the group to determine who should pay the tax.  What should the question be, and why is this a harder problem?

Your thoughts on either problem?

Why are textbook prices so high?

…one of the major causes of higher priced new textbooks is the used
textbook market.  For example, if the fixed cost of producing a textbook
is $500,000 and 5,000 units of the book are sold each year for 4 years
then each textbook would bear $25 of the fixed cost.

However, if, due to the used textbook market, only the first 5,000
units are sold and, in each of the remaining three years these same
5,000 units are sold as used textbooks, then the publisher still has
the $500,000 in fixed costs spread out over only 5,000 books.  Thus each
new textbook bears $100 of fixed costs, resulting in higher retail
prices for all textbooks.  This example demonstrates what has been
happening in the textbook market over the past several years: As the
used textbook market has expanded so have the market prices of new and
used textbooks.

Here is more, but is that correct?  To the extent this is a superstars market, where the leader becomes a focal choice and earns rents, the downward price pressure won’t induce a proportionate supply reduction.  (There would be, however, less ex ante competition to obtain this spot, which may involve supply reductions.)  For less successful books, which inhabit a more competitive sector of the market where costs more likely bind, this analysis is more likely correct.

Paraphrasing Alex, I might note: "We know that textbook innovation saves lives and has a very high benefit to cost ratio.  Thus, price controls or other restrictions that reduce prices are almost certainly a bad idea."

GMU and Prizes

GMU people study prizes, sponsor prizes and we win some also!  Must be something in the water.

A George Mason University chemistry professor has won a $1 million
engineering prize for developing a simple and inexpensive means of
filtering arsenic from well water, an advance that is already
preventing serious health problems in hundreds of thousands of people
in his native Bangladesh and could help millions of others around the

The 2007 Grainger Challenge Prize for Sustainability,
administered by the National Academy of Engineering, will go to Abul
Hussam of Centreville, academy officials announced yesterday…

His final creation — an easy-to-make, maintenance-free, two-tiered
system that uses sand, charcoal, bits of brick and shards of a widely
available kind of cast iron — removes virtually every trace of arsenic
from well water. It wowed an independent panel of engineering academy
judges who, under the rules of the prize, were looking for an
affordable, reliable, socially acceptable and environmentally friendly
solution to the arsenic problem that did not require electricity.

rules also required that the product be proven in field conditions, not
just in a lab….The 2007 sustainability prize is the first in a series to be funded by
the Grainger Foundation of Lake Forest, Ill., created in 1949 by an
electrical engineer.

Thanks to Nitpicker for the pointer.

Government-driven inequality?

The ever-interesting ApeMan writes:

If you grant that overregulation, excessive lawsuits, and complex tax codes all present problems that increase the demand for high I.Q people, then the price for the labor of high I.Q actors should rise until demand and supply stabilize.  Therefore, it follows that if you grant that regulations, the rate of lawsuits, and the complexity of the tax codes are not optimal, then you must admit that the pay rate for high I.Q people is not optimal either.

A good point, but I am not convinced that a highly regulated society boosts income inequality.  On the flip side, the regulators themselves earn government salaries, and that favors greater equality.  Either they are the dregs pulled up a bit, or some otherwise high-salaried lawyers move to the greater security of the public sector.

How about inefficient regulation itself? 

Lots of smart people earn a mint finding creative ways around complexities in the tax code and in regulations.  But I still believe that those complexities tax smart people more than they benefit them.  The smart lawyer is paid so much only because some other smart guy wants to walk through that loophole and is otherwise suffering under the regulatory lash.

Imagine that a regulation chokes off an entrepreneurial opportunity worth $100 million.  Without regulation, one entrepreneur would have earned that much.  With regulation, a bunch of smart lawyers rake off, say, $20 million of the total but that is still a more equal distribution than the former scenario (which is not to say it is better).  An alternative scenario is that such large gains are usually spread across many shareholders, and lawyers walk in as the big winners, thereby boosting inequality, but I do not think that is the primary case.

Furthermore inequality tends to rise with wealth (imagine the Gini coefficient for Bel-Air), so inefficiencies which destroy wealth tend to lower inequality, albeit not for the better.

The Mexico or Indonesia scenario is different.  Government creates some monopolies and a small number of people get very rich from them.  That is unlike the case where smart lawyers get smart people through hurdles. 

The bottom line: To the extent income inequality is higher, I don’t view government as a fundamental cause, at least not in the United States.

Go for the Gold!

Here from Business Week is a very cool story on a prize I had not heard of before.

A few years back, Toronto-based gold mining company Goldcorp (GG)
was in trouble. Besieged by strikes, lingering debts, and an
exceedingly high cost of production, the company had terminated mining
operations….Chief Executive Officer Rob McEwen needed a miracle. Frustrated that
his in-house geologists couldn’t reliably estimate the value and
location of the gold on his property, McEwen did something unheard of
in his industry: He published his geological data on the Web for all to
see and challenged the world to do the prospecting. The "Goldcorp
Challenge" made a total of $575,000 in prize money available to
participants who submitted the best methods and estimates…

Within weeks, submissions from around the world were flooding into
Goldcorp headquarters. There were entries from graduate students,
management consultants, mathematicians, military officers, and a
virtual army of geologists….

The contestants identified 110 targets on the Red Lake property,
more than 80% of which yielded substantial quantities of gold. In fact,
since the challenge was initiated, an astounding 8 million ounces of
gold have been found–worth well over $3 billion. Not a bad return on a
half million dollar investment.

Price Controls on Pharmaceuticals

Frank Lichtenberg uses a novel strategy to estimate the effect of price controls on innovation.  Simplifying (see the paper for details) Lichtenberg argues that the profit from a pharmaceutical is essentially P*Q-FC where P is price, Q is quantity and FC is fixed cost.  Most of the fixed cost is due to research and development and getting through FDA hurdles.

The key to Lichtenberg’s strategy is to note that changes in Q have the same effect on profit and thus on the incentive to innovate as changes in P (this is not really true since changes in P also influence Q but Lichtenberg adjusts for the elasticity of demand).  Moreover we can estimate the effect of changes in Q on innovation by looking at how the incidence of a disease influences innovation.  Lichtenberg finds, for example, that pharmaceutical innovation is higher among cancers with greater incidence (e.g. lung versus pancreatic cancer).  Using the Q to innovation relationship he estimates that a 10% reduction in price would reduce pharmaceutical innovation by 5%.

We know that pharmaceutical innovation saves lives and has a very high benefit to cost ratio.  Thus, price controls or other restrictions that reduce prices are almost certainly a bad idea.

Indeed, as I have argued before, health care spending on the margin has very low value.  We know, for example, that Medicare regions that spend twice as much on patients have no better outcomes.  Spending on health care research and development, however, has very high value.  Thus price controls would be a disaster – reducing high value R&D and replacing it with low value current spending.

I fear that short-term thinking by politicians and the public will destroy the US pharmaceutical industry.